TEXT-Fitch rates Rochester, N.Y. GOs 'A+', outlook stable

Reuters Staff

8 Min Read

(The following statement was released by the rating agency)

July 25 - Fitch Ratings assigns an 'A+' rating to the following Rochester,
NY (the city) limited tax general obligation (LTGO) bonds:
--$66.943 million general obligation serial bonds - 2012, series I.
The bonds are expected to price via competitive sale the week of July 30.
Proceeds will be used to retire outstanding bond anticipation notes and finance
various capital improvement projects.
The Rating Outlook is Stable.
SECURITY
The current issue is a general obligation of the city for which the city has
pledged its full faith and credit and ad valorem tax, subject to the 2011 state
statute limiting property tax increases to the lesser of 2% or an inflation
factor (the tax cap law). This limit can be overridden annually by a 60% vote of
the city council.
KEY RATING DRIVERS
SATISFACTORY RESERVES: General fund reserves, combined with available liquidity
in other governmental funds, provide ample operating flexibility.
DIVERSIFIED REVENUE STREAM: The city's general fund relies on a diverse mix of
revenues, including property taxes, sales taxes and state aid.
MANAGEABLE DEBT BURDEN: Despite the city's rapid pay-out of existing debt,
leverage remains moderate on a per capita basis but high as a percentage of
market value, reflecting the city's weak tax base.
SIZEABLE FIXED-COST BURDEN: Pension costs are moderate but growing rapidly,
which Fitch believes will lead to budgetary pressure over the medium term.
Significant long-term costs related to other post-employment benefits are also a
concern.
WEAK SOCIOECONOMIC PROFILE: Wealth levels are well below average, driven by a
notably high poverty rate and persistently high unemployment. In addition, the
recent bankruptcy filing of one of the city's largest employers will likely
constrain any future employment growth.
CREDIT PROFILE
ECONOMY TRANSITIONING AWAY FROM KODAK RELIANCE
Rochester is New York's third largest city and is located in Monroe County
(Fitch rates the county's GOs 'A-' with a Stable Outlook) in north central New
York. The city serves as the economic center for the region and is anchored by
higher education and healthcare. Major employers include the University of
Rochester/Strong Memorial Hospital with over 20,000 employees, Wegmans (13,976),
Rochester General Health System (7,600), and Xerox (6,116), which moved its
headquarters away from Rochester in 1978 but still maintains a sizeable
presence.
The city's economy has been diversifying away from its roots in manufacturing
and imaging. Eastman Kodak was historically the largest employer with over
60,000 employees in the 1980s, but is now down to 5,129 employees and recently
filed for chapter 11 bankruptcy protection in January 2012. While the city's
economy has been able to withstand the historical reduction in Eastman Kodak's
labor force, it remains among the city's largest employers. Fitch will continue
to actively monitor further developments stemming from the bankruptcy filing.
Favorably, the city currently has a number of ongoing development projects to
encourage corporate development near the University of Rochester.
INFERIOR SOCIOECONOMIC PROFILE
Socioeconomic indicators are depressed with per capita income levels at 58% of
the state average and individual poverty rates more than double the state and
national mean. The city's May 2012 unemployment rate is a high 10.8%, well above
the state (8.6%) and national (7.9%) averages. The 2010 census data show a 4%
decline in population over the past decade.
STABLE FINANCIAL POSITION
Revenues are well diversified, with property tax, sales tax and state aid making
up the bulk of revenues. The city's taxable assessed value (TAV) has remained
steady through the nationwide economic downturn, with the FY 2013 level up 2.3%
from the prior year. As a result, the residential tax rate was reduced for
fiscal 2013 to $19.32 per $1,000, a five-year low. The non-homestead tax rate is
up slightly to off-set declines in non-homestead TAV, but management expects the
TAV rate to rebound through plant investment by Rochester Gas and Electric, the
city's largest taxpayer at 10.5% of TAV. Home prices remain stable. Tax
collections are below average, averaging between 92% and 93% collected within
the fiscal year of the levy.
The city's general fund has consistently generated operating surpluses since
fiscal 2007, raising the general fund balance to a solid level. Fiscal year 2010
ended with a $4.4 million surplus after transfers, bringing total general fund
reserves to $34 million and unreserved levels to $13.3 million or 2.9% of
expenditures plus transfers out.
The city has historically kept reserve levels low by maintaining substantial
fund balances in other funds that are readily available for general fund
operations. These funds include the debt service fund and an internal service
fund, which had a $28 million fund balance at the close of fiscal 2011.
Additionally, the city makes sizeable annual transfers to the capital projects
fund, including a $27 million transfer in fiscal 2011, which could be reduced if
necessary.
FY 2011 ended with a large increase in general fund balance levels. The city had
a net operating surplus after transfers of $33.7 million, ending the year with
an unrestricted fund balance (the sum of committed, assigned and unassigned as
per GASB 54) of $61.4 million or a solid 13.1% of expenditures. Fitch notes that
the sizeable increase in general fund balance was driven in part by transfers
required by GASB 54. The city made approximately $27 million of transfers from
the debt service fund related to the reclassification of a retirement fund and a
sinking fund. Net results of the combined general fund and debt service fund was
a $4 million deficit. However, these results also reflect a net $8.7 million net
transfer to the internal service fund, which is available for operations as
needed. Operationally, 2011 results featured a 4.6% increase in sales tax
revenues and savings from a hiring freeze, offsetting a mid-year reduction in
state aid.
The city is anticipating a $4.9 million surplus for the recently completed
fiscal 2012, due in part to a 5% increase in sales tax revenue compared to a 1%
increase included in the adopted budget. Approximately 200 employees accepted an
early retirement incentive, partially offsetting a decline in state-aid. The
city does not anticipate any notable transfers.
The FY 2013 adopted budget anticipates a $3.5 million use of fund balance. Sales
tax revenue is budgeted to increase by 2% and the property tax levy is flat,
with rates decreased to offset an increase in TAV. State aid revenue will be up
as a result of a $15.5 million spin-up payment. The proceeds of this payment
will be used to off-set the bulk of a $17.3 million increase in pension
payments. The spin-up is the acceleration of a March 2014 payment from the state
to June 2013, so the city benefits from the payment in FY 2013 while the state
is unaffected, as the payment remains within its 2014 fiscal year. State aid is
expected to revert to approximately its prior level in FY 2014.
PENSION AND OPEB COSTS CREATE PRESSURES
The city is facing growing fixed costs in the form of pension and OPEB payments.
The FY 2011 pension payment for employees in the general fund was $25.9 million,
or 5.5% of general fund expenditures. The FY 2012 payment will increase to $31.3
million, while the FY 2013 payment is budgeted for $48.4 million, which will be
off-set partially by the spin-up payment from the state.
Pension costs are forecast to peak at about $61 million in fiscal 2015 before
gradually declining to a relatively similar level. Fitch believes the projected
rise in pension costs will consume an above-average level of general fund
resources going forward, which could lead to